On September 30, 2011, following numerous years of litigation, the Quebec and Canadian governments announced a memorandum of understanding (MOU) concerning the harmonization of the Quebec sales tax (QST) and the goods and services tax (GST).
This MOU sets out several changes to the QST system starting January 1, 2013.
The harmonization will not have much of an impact on consumers since the products and services they purchase will be taxed the same way as they are now. However, the changes could have a significant impact on Quebec businesses, and especially large businesses, without proper planning. The changes include the:
- Elimination of the majority of input tax refunds (ITRs) for QST paid for financial institutions (going forward, financial services will be exempt rather than zero-rated);
- Gradual elimination of restrictions on certain ITRs for large businesses (with sales in Canada exceeding $10M).
Adjusting to the Changes
The majority of companies doing business in Quebec will have to adjust their systems and procedures by 2013. Based on what has been made public until now, there will be six main changes to the QST system:
- The QST will apply to the selling price, excluding the GST;
- The QST rate will be adjusted to the effective rate of 9.975%;
- ITR restrictions for large businesses will be gradually eliminated over eight years;
- Financial services will become exempted services and financial institutions will no longer be able to claim ITRs for the QST paid on their purchases relating to these exempted services;
- As of April 1, 2013, the Quebec and Canadian governments will pay the QST on their purchases. As for the Quebec government, it will also pay the GST/HST as is currently being done by the Canadian government;
- There will also be certain changes concerning the applicable interest rate and penalties.
What Remains the Same
The Quebec government maintains its tax autonomy in this agreement. Therefore, it will continue to administer the QST and GST on the Quebec territory. Furthermore, it will retain flexibility with respect to tax policy, such as:
- The ability to increase or reduce the modified QST rate.
- Certain specific measures in Quebec remain the same, such as the administrative measures provided for in the Quebec Tax Administration Act, the zero-rating rules for motor vehicles acquired for re-sale, the control measures for the clothing and restaurant industries, etc.
- Quebec can set its own modified QST tax refund rates for municipalities, universities, teaching hospitals, charity organizations and not-for-profit organizations. The current QST refund structure for municipalities will only apply until December 31, 2013.
There are numerous, complex QST harmonization rules. Consult a Raymond Chabot Grant Thornton tax expert today; we would be pleased to help you.